Albright Morarji and Pandit Ltd. vs Central Board of Direct Taxes and others

Pendse, J.—The Petitioner is a public limited company engaged in the manufacture and sale of phosphoric acid and industrial phosphates. One of the industrial phosphates manufactured by the petitioner is known as Sodium Tripolyphosphate and this produce was manufactured under a licence from an English Company known as Albright & Wilson Limited, London. The petitioner had entered into an agreement dated November English Company was to build and operate a plant and provide the know-how to the petitioner for manufacture of sodium tripolyphosphate. In the year 1976, Hindusthan Lever Limited, a company carrying on several business activities in India, decided to set up a plant at Haldia, near Calcutta, for the manufacture of sodium tripolyphosphate having an output capacity of 30,000 tonnes per annum. Hindustan Lever entered into a tripartite agreement with Albright & Wilson Limited, London - the English company - and Dharamsi Morarji Chemicals Company Limited, on June 15, 1976, and under this agreement, Dharamsi Morarji Chemicals Company Limited was to erect the plant and the English Company was to supply technical know-how for running the plant and for manufacture of the produce. On December 13, 1976, the petitioner entered into an agreement with Hindustan Lever Limited whereby the petitioner was to render services by way of providing imparting and operating technical expertise to Hindustan Lever Limited for the manufacture of sodium tripolyphosphate.

Section 80MM of the Income Tax Act, 1961, provides for deduction, in computing an Indian company''s total income, of 40% of any fees received by the Indian company in consideration for the provision of technical know-how, provided that the agreement under which such fees are received is approved by the Central Board of Direct Taxes. The petitioner who was to receive fee of Rs. 35 per tonne of sodium tripolyphosphate produced in the plant of Hindustan Lever Limited for a period of ten years from the commencement of the commercial production as per the agreement, applied for the approval of the agreement u/s 80MM of the Act on February 27, 1979. After certain correspondence, on December 8, 1980, the petitioner received a letter dated November 28, 1980, from the Secretary of respondent No. 1 informing that the 1st respondent Board had declined to approve the agreement for the purpose of section 80MM of the Act. The reason given for the refusal was that the agreement did not provide for furnishing of any technical know-how of the petitioner to Hindustan Lever Limited but merely prescribes for lending of services of three technicians of the petitioner for the purpose of attending to post-commissioning problems of the plant. The petitioner again applied to respondent No. 1 to reconsider the decision and by a letter dated July 20, 1981, the petitioner was informed that the 1st respondent Board did not find any justification to modify its earlier order. One more effort was made by the petitioner requesting the 1st respondent Board to revise the decision, but that effort also failed as the 1st respondent Board addressed a letter dated June 25, 1982, informing that the refusal of approval did not require any modification. Feeling aggrieved by the action of the 1st respondent Board, the petitioner has approached this court by filing the present petition on September 20, 1982, under article 226 of the Constitution of India.

Shri Dalvi, learned counsel appearing on behalf of the petitioner, submitted that there has been total non-application of mind by the 1st respondent Board in refusing approval to the agreement between the petitioner and Hindustan Lever Limited u/s 80MM of the Income Tax Act. It was contended that a perusal of the reasons given by the 1st respondent Board by three communications indicates that either the 1st respondent Board has not applied its mind to the contends of the agreement or has misread the same. Shri Dalvi urges that the services to be rendered by the petitioner to Hindustan Lever Limited under the agreement would fall within clause (iv) of sub-section (2) of section 80MM of the Act. Learned counsel relied upon various terms of the agreement in support of the submission and urged that by wrongful refusal of the 1st respondent Board, the petitioner would be denied tax benefit which may amount approximately to Rs. 24,00,000. Shri Dalvi urged that the production in the plant of Hindustan Lever Limited commenced in the year 1979 and the advantage of section 80MM of the Act was available till the year 1984, the year when the section was deleted by Parliament.

Shri Jetly, learned counsel appearing on behalf of the respondents, on the other hand, urged that the refusal of the 1st respondent Board grant approval to the agreement u/s 80MM of the Income Tax Act is perfectly in order. Learned counsel urged that apart from the fact that the agreement between the petitioner and Hindustan Lever Limited did not prescribe for providing technical know-how which is likely to assist in the manufacture of the product, there is grave doubt about the genuineness of the agreement itself. Shri Jetly submitted that a perusal of the initial agreement between the petitioner and the English company, the agreement between the petitioner and Hindustan Lever Limited and the tripartite agreement between the English Company, Hindustan Lever Limited and Dharamsi Morarji Chemicals Company Limited, would leave no manner of doubt that the agreement between petitioner and Hindustan lever Limited was a colourable one or was a mere camouflage to secure the benefit of the provisions of the section 80MM of the Act. Shri Jetly contended that though the communication did not specifically recited that the agreement between the petitioner and Hindustan Lever Limited was not genuine, the said inference is obvious, as the Board had passed the order refusing approval after taking into consideration the various clauses of the three agreements.

The relevant portion of section 80MM of the Income Tax Act, 1961, reads as under :

"80MM. Deduction in the case of an Indian company in respect of the royalties etc., received from any concern in India.

(1) Where the gross total income of an assessee, being an Indian company, includes any income by way of royalty, commission, fees or any other payment (not being income chargeable under the head ''Capital gains'') received by the assessee from any person carrying on a business in India in consideration for -

(i) the provision of technical know-how which is likely to assist in the manufacture or processing of goods or materials, or in the installation or erection of machinery or plant for such manufacture of processing, or in the working of a mine, oil well or other source of mineral deposits, or in the search for, or discovery or testing of, mineral deposits, or winning of access to them, or in carrying out any operation relating to agricultural animal husbandry, dairy or poultry farming, forestry or fishing, or

(ii) rendering services in connection with the provision of such technical know-how,

under an agreement entered into by the assessee with such person on or after the 1st day of April, 1969, and approved by the Board in this behalf of there shall, in accordance with and subject to the provisions of this section, be allowed a deduction from such income of an amount equal to forty per cent. thereof, in computing the total income of the assessee :...."

A plain reading of this section makes it clear that the assessee who claims advantage of this section must establish that the agreement was entered into to receive fees in consideration for providing technical know-how which is likely to assist in the manufacture or processing of goods or materials, or in the installation or erection of machinery or plant for such manufacture. It is not the claim of the petitioner that the agreement with Hindustan Lever Limited provides for installation or erection of machinery or plant for manufacture of Sodium tripolyphosphate. Shri Dalvi very fairly stated that the plant set up by Hindustan Lever Limited was installed or erected by Dharamsi Morarji Chemicals Company Limited in accordance with the tripartite agreement dated June 15, 1976. The submission of learned counsel is that the petitioner provided technical know-how which is likely to assist in the manufacture of sodium tripolyphosphate. To appreciate the submission of learned counsel, it is necessary to refer to certain provision of the agreement between the petitioner and Hindustan Lever Limited Reliance was placed on clauses 1.03 and 2.06 which, inter alia, prescribe the willingness of the petitioner to render services by providing technical expertise and which also defines the expression "technical expertise". Clause 3 of the agreement provides that the petitioner will render technical services to Hindustan Lever Limited for a period of ten years from the commencement of the commercial production. Clause 4.01 of the agreement reads as under :

"4.01. Upon the satisfactory completion and commissioning of the plant by HL''s contractors, AMP shall, pursuant to its obligations under this agreement make available to HL not more than three technicians (hereinafter called ''the AMP technicians'') to assist HL''s own management team in the technical operation of the plant."

Clause 4.05 provides that the petitioner shall give Hindustan Lever technicians assistance, training facilities and practical operating experience of the various sections of its plant at Ambernath for an aggregate period not exceeding eighteen man-months, provided however that the number of such technicians at any time shall not be more than three. Clause 8 of the agreement permits Hindustan Lever Limited to use relevant patents of the petitioner connected with the process/technical information used in the manufacture of the product, while clause 9.03 grants permission to Hindustan Lever Limited to use drawings and other documents. Relying on these clauses of the agreement, it was submitted by Shri Dalvi that the petitioner has acquired considerable know-how and expertise in the manufacture of sodium tripolyphosphate in Indian production conditions by virtue of years of experience and this know-how was agreed to be supplied to Hindustan Lever Limited. It was further contended that as the technical know-how was likely to assist Hindustan Lever Limited in the manufacture of the product, the provisions of section 80MM of the Act are squarely attracted.

It is not possible to accept the submission of learned counsel. It is required to be borne in mind that the agreement between the petitioner and the English company which was entered into on November 10, 1966, and the specifically provides that the petitioner shall, during the continuance of the agreement and, thereafter, not disclose the un patented information disclosed to it by the English Company by virtue, or as a result, of the implementation of the agreement. The petitioner was required to ensure that the information received from the English Company is kept secret. The agreement also requires that the English Company will not either directly or in association with any other person, compete with the petitioner in the manufacture or sale in India of the product in respect of which technical know-how was supplied. These clauses in the agreement between the petitioner and the English company make it clear that the petitioner could not have entered into an agreement with Hindustan Lever Limited to provide any technical know-how without the prior approval or consent of the English Company nor could the English Company enter into an agreement with Hindustan Lever Limited without the consent of the petitioner. With this background, the English company entered into an agreement with Hindustan Lever Limited on June 15, 1976, and this agreement prescribes that Hindustan Lever Limited would be provided with technical know-how for installation an direction of plant and installation will be carried out by Dharamsi Morarji Chemicals Company Limited. Clause 7 of the agreement provides for technical assistance after commercial operation of the plat and clause 7.01 prescribes for the English company giving Hindustan Lever Limited all technical information required for better operation of the plant. Clause 7.02 provides that the English Company will give to Hindustan Lever Limited for period of ten years from the date of commencement of commercial production all such help, the assistance and advice as may be required, necessary or proper for the smooth, proper and efficient implementation of the plant and, in particular, for removing or avoiding any bottlenecks or other problem or difficulties that may arise in the day-to-day running of the plant. Clause 10 deals with technical information to be furnished by the English Company and clause 10.02 requires the English Company to disclose to Hindustan Lever Limited the contents of phosphoric acid desulphation section of the Plant Design Dossier referred to in clause 3 of the agreement. The English Company, under the agreement undertook to train the technicians of Hindustan Lever Limited for the purpose or running the plant and for the manufacture of sodium tripolyphosphate. Clause 11.03 refers to the agreement entered into By Hindustan Lever Limited with the petitioner. It is requires to be emphasised that the petitioner has entered into an agreement with Hindustan lever Limited only two days before the tripartite agreement between the English company, Hindustan Lever Limited and Dharamsi Morarji Chemicals Company Limited. From a perusal of the two agreements, it becomes clear that the entire technical know-how for erection of the plant and for manufacture of sodium tripolyphosphate was to flow from the English company. The English Company was to supply technical know-how to Hindustan Lever Limited after commencement of production in the plant and also understood to train the technicians for successful running of the plant. Reading various clauses of the tripartite agreement, it becomes clear that the entire know-how was to be supplied by the English company.

Shri Dalvi urged that though there are several clauses in the tripartite agreement prescribing that the technical know-how given for the manufacture of the product was to come from the English company, still as the agreement between the petitioner and Hindustan Lever Limited provides for supply of some technical know-how for the manufacture of the product, it must be concluded that the agreement attracts the provisions of the section 80MM of the Act. It is not possible to accept the submissions of learned counsel for more than one reason. In the first instances, it is difficult to ascertain what technical know-how was to be supplied by the petitioner to Hindustan Lever Limited and which was likely to assist in the manufacture of the product. I specifically enquired from learned counsel state what was the technical know-how which the petitioner could have supplied and learned counsel referred to the clauses of the agreement. Shri Dalvi emphasised that the petitioner has acquired technical know-how in respect of the manufacture of the product in Indian condition and that was agreed to be supplied to Hindustan Lever Limited under the agreement. It is difficult to hold that the agreement between the petitioner and Hindustan lever Limited is a real and genuine one under which any technical know-how was to be supplied and which was likely to assist in the manufacture of the product. The entire technical know-how was agreed to be supplied by the English company and the agreement between Hindustan Lever Limited and the petitioner does not seem to be real, but a colourable one to cover some other transactions. Secondly, even assuming that some technical know-how was to be provided by the petitioner to Hindustan Lever Limited, it was conceded by Shri Dalvi that such technical know-how was not enough or sufficient to enable Hindustan Lever Limited to manufacture the product. It was accepted that in the absence of technical know-how to be supplied by the English Company, Hindustan Lever Limited would not be in a position to manufacture the end product. In other words, the submission is that if there are several stages in the manufacture of the end product, then, furnishing technical know-how for some of the stages is enough to attract the provisions of section 80MM of the Act. It is not possible to accept the submissions of learned counsel. Section 80MM of the Act permits deduction provided fees are received in consideration for supply of technical know-how which is likely to assist in the manufacture of the product. The section prescribes for deduction and being a departure from the normal rule, the assessee claiming advantage under the section must prove strictly that the terms of the section are complied with.

Shri Dalvi urged that with reference to some documents on record that the petitioner did assist Hindustan Lever Limited in running the plant and removing bottlenecks in the production and submitted that as the petitioner has established that assistance was given to Hindustan Lever Limited, it must be held that the agreement between the petitioner and Hindustan Lever Limited was a real and genuine one and not a cover for some other transactions. It is not possible to accept the submissions of learned counsel, because what is required to attract the provisions of section 80MM of the Act is supply of technical know-how which is likely to assist in the manufacture of the product and not some assistance in working the plant. In my judgment, the petitioner is not entitled to claim advantage of the deduction under this section.

Shri Dalvi complained that the 1st respondent Board did not refuse to grant approval on the ground that the agreement was not a genuine one, but proceeded on grounds which are unsustainable. Learned counsel urged that the reason given in the first communication was that the agreement merely provided for lending of the services of three technicians for the purpose of attending to post-commissioning problems. The reason given in the remaining two communications, says Shri Dalvi, are equally vague and erroneous. The submission is not very accurate. The copy of the second communication dated July 20, 1981, is annexed as exhibit "G" to the petition. It is not in dispute that this order was passed by a member different from the one who had passed the earlier order refusing approval. Exhibit "G" sets out that after hearing the petitioner, it was noticed that the technical know-how relating to the process for the manufacture of the product and also for designing, establishing and operating the plant was provided by the English company. In addition, the English Company was furnishing technical information, assistance and advice that was required for the smooth, proper and efficient operation and implementation of the plant. It further reacts that under the agreement between the petitioner and Hindustan Lever Limited, only services of three technicians for the operation of the plant were provided and the agreement does not involve the provisions of technical know-how within the meaning of the sub-section (2) of the section 80MM of the Act. Shri Jetly submits, and in my judgment with considerable merit, that what the member of the 1st respondent Board desires to convey was that the agreement between the petitioner and Hindustan Lever Limited was an empty one and apart from the fact that it did not clearly spell out what was the technical know-how to be supplied and how it was likely to assist in the manufactured of the end product, it was not a real and genuine agreement but was a colourable transaction probably with a view to secure the benefit of the deduction under this section. It is true that the communication does not state in clear terms that the agreement between the petitioner and Hindustan Lever Limited was not a real and genuine one, but that inference can well be drawn by a perusal of the three agreements referred to hereinabove and the fact that Hindustan Lever Limited entered into an agreement with the petitioner and the English company almost simultaneously. It cannot be overlooked that Hindustan Lever Limited was going to be a strong competitor to the petitioners in the manufactures of the product and it is unlikely that the petitioners would agree to supply any technical know-how which Hindustan Lever Limited has not secured from the English company. In these circumstances the submission of Shri Jetly that the agreement between the petitioner and Hindustan Lever Limited was merely a cover for some other transaction cannot be ruled out. Shri Dalvi urged that the petitioner was not tale at any stage that the 1st respondent Board was to reject the application for approval on this count and, therefore, the matter should be remitted back to the Board for fresh appraisal and for giving an opportunity to the petitioner to establish that the transaction was a genuine one is correct. Another reason for not accepting the submission of Shri Dalvi is that I am exercising writ jurisdiction under article 226 of the Constitution of India and I am not sitting as an appellate authority over the decision of the 1st respondent Board. It is not permissible for me to substitute my decision in place of that taken by the 1st respondent Board and it is equally not permissible to disturb the decision, unless I come to the conclusion that the decision is such which no reasonable person could arrive at on the available material. In my judgment, the decision reached by the 1st respondent Board cannot be said to be perverse or one which cannot be sustained on the available material. In these circumstances, I am not inclined to exercise the writ jurisdiction and disturb the conclusion of the 1st respondent Board or remit the matter for fresh appraisal.

Accordingly, the petition fails to the rule is discharged, but without any order as to costs.